President Obama has pushed Congressional Democrats under the (already crowded) bus and reached a deal with Republicans to maintain the existing income tax rates and even throw in a few substantial cuts.

Here are details of the emerging deal:
  • Extends unemployment insurance for 13 months. Two million workers in December, and 7 million over the next year, would have lost benefits otherwise.
  • Provides a one-year, 2 percentage point reduction in employees' Social Security payroll taxes, lowering the rate from 6.2% to 4.2%, at a cost of $120 billion.
  • Keeps the Earned Income Tax Credit and American Opportunity Tax Credit increases from last year's economic stimulus law, for another $40 billion in tax cuts for families and students.
  • Allows businesses to write off 100% of their capital purchases next year.
  • Sets the estate tax at 35% for two years, with a $5 million exemption on assets that's higher than last year's $3.5 million. The rate came down under Bush's policy from 55% before 2001 to 45% in 2009 before expiring this year. It was set to return at 55% next year.
  • Protects millions of taxpayers from seeing their taxes raised in 2010 and 2011 under the Alternative Minimum Tax.

I think the President is making a huge strategic miscalculation though:

Obama stressed that he didn't like two elements of the deal -- the temporary extension of tax cuts for upper-income Americans, which he said would have cost $700 billion if stretched for the entire next decade, and making the estate tax exemption more generous for the same time period.

In two years, he said, "It will become apparent that we can't afford these tax cuts any longer." The White House said it expects a vigorous debate about that during the 2012 presidential election.

So... during the 2011 campaign either a) the economy will be recovering strongly, or b) the economy will still be struggling with anemic growth. In which of these scenarios does Obama envision an American public eager for tax hikes that "we can't afford"?

Speaking of things "we can't afford", you'll notice that this deal does nothing to reduce spending, the deficit, or the debt. Tax cuts are good, but repeat after me: the real problem is that we spend too much.

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